Breach of Real Estate Contract: A Broken Promise
If you have ever purchased real estate property, and certainly if you invest in commercial or residential real estate as a business, then you know that the time between signing a real estate contract and closing on the property can be a stressful period. While many closings are completed without issue, some real estate contracts are not performed or are anticipatorily breached which can prevent the closing from occurring or result in a different outcome than the parties bargained for.
Under California laws, a contract for the sale of real estate must be in writing. When the parties sign the real estate contract, they are agreeing to all of the terms contained in the agreement. Violating one or more of these terms means results in a breach of contract.
If you are buying or selling real estate, particularly as a commercial endeavor, it is critical that you know and understand the terms of your agreement, so you can defend your rights under the contract in the event that the other party violates the agreement and also to ensure that you do not inadvertently breach the contract yourself.
When is a real estate contract breached?
A breach of contract can be any violation of a term contained within your real estate contract. However, the remedies available to the non-breaching party will depend on whether the breach was material or minor.
Material Breach
A breach of contract is material if the breaching party’s actions, or failure to act, substantially impacts the non-breaching party resulting in the non-breaching party not getting the result they bargained for.
Non-Material Breach
A non-material breach occurs when a party violates a more minor or tangential condition of the contract. In this event, the non-breaching party may be entitled to compensation if they can prove that they were damaged by the breach.
Why does the distinction between a material breach and a non-material breach matter?
The differences between the remedies available to a non-breaching party in the event of a material breach versus a non-material breach are significant. When a material breach of contract occurs, the non-breaching party could elect not to perform their responsibilities under the contract.
In addition, the non-breaching party will have the option to sue the breaching party for monetary damages and, in some cases, seek specific performance.
Specific Performance
Specific performance is when the court orders the breaching party to take a particular action. Typically, under contract law, even when a party materially breaches the contract, the law requires them to pay money damages only—it does not force the breaching party to take a specific action.
However, where money damages would be an inadequate remedy, the court may order the party to actually fulfill their obligations under the contract. In the context of a real estate contract, specific performance may include transferring ownership of the property to the non-breaching party. This comes in very handy with real estate sales transactions because It is presumed that the breach of an agreement to transfer real property cannot be adequately relieved by pecuniary compensation. Furthermore, for a single-family dwelling that the buying party seeking performance intends to occupy, the presumption is conclusive.
Seller’s Remedies When a Buyer Breaches Real Estate Contract
If you entered into a contract to sell real estate, but the buyer has breached the terms you agreed to, the remedies available to you will depend on whether the buyer made a material or non-material breach. The most common material breach by buyers in real estate contracts is failing to follow through with a closing and not actually paying for and taking possession of the property as agreed to in the contract.
When a buyer breaches a real estate contract, the seller may be entitled to monetary damages. However, it is less common that the buyer will be ordered to perform a specific action like taking possession of the property because monetary damages are generally sufficient to compensate a non-breaching seller, as it is easier for a seller to find another buyer in the market than it is for a buyer to find a replacement property.
The seller’s primary damages will usually be calculated based on the difference between the amount due under the real estate contract and the fair market value of the property at the time of the breach. The seller can also recover other consequential damages and interest.
Buyer’s Remedies When a Seller Breaches Real Estate Contract
If a seller refuses to close on a property after signing a real estate contract, either because they changed their mind or they received a better offer from someone else, they may be in breach of contract.
Specific performance will tend to be the preferred remedy for a buyer when a seller breaches the sales agreement. However, a buyer is also entitled to damages including the price actually paid, title and escrow expenses, the difference between the price agreed on and the value of the property at the time of breach; expenses in preparing to enter the property; consequential damages; and interest.
How to Avoid Breach of Real Estate Contract
As with any contract, the best way to avoid a dispute over a breach of contract is to have a clear written agreement that sets forth the expectations and obligations of each party and anticipates challenges that may arise. The best way to plan for these challenges is to incorporate contingency clauses into the contract and fully discuss them before the parties execute the agreement.
When dealing with real estate sales, there are often a lot of moving pieces: relocation of a job, closing of a previous home, a seller finding another home, a buyer securing funding, and a successful home inspection. To plan for these challenges that can be anticipated, it is wise to include contingency clauses in your real estate contract so that if an issue arises to the point where a contingency cannot be met, no breach will result.
Adding a Contingency Clause
In a contingency clause, you can state that certain obligations of a party—including to actually buy or sell the property—are contingent on the fulfillment or occurrence of some preceding condition. Parties can agree to make the sale itself contingent upon fulfillment of some condition, like passing a successful home inspection, or they may agree that the stated closing date will be contingent upon some condition. For example, the seller may agree to a particular closing date, contingent upon the seller finding another property to relocate to.
If you are a party to a real estate contract that you believe has been breached or you need advice about your rights and obligations under a real estate contract, contact our experienced and knowledgeable team of real estate attorneys at The Myers Law Group today.